A bumper crop of U.S. soy beans is heading for harvest but China isn’t buying, so where will American farmers sell their crop…and how will they ship them there?
American farmers expect a bumper soybean harvest this year. If only they can figure out where to sell the fruits of their labor.
The problem, of course, is China, which, before the current trade war with the US, accounted for more than 60% of total American soybean exports and was eight times larger than the next biggest market. After the Trump administration slapped duties on a wide array of Chinese imports, Beijing retaliated with tariffs of their own. China imposed a 25% duty on American soybeans, which caused the market to collapse. The volume of soybeans shipped to China in recent weeks is down some 97%, according to the USDA, with no resolution in sight.
One partial solution, suggest some, is an aggressive diversification of markets. That, however, will necessitate much smaller shipments destined for many more ports, both of which translate into an emphasis on containerization, said Scott Sigman, the transportation and infrastructure lead at the Illinois Soybean Association.
“Global supply chains are in flux as vessel owners and operators, shippers of goods and merchandizers are trying to find new partnerships and new trade lanes back and forth,” said Sigman of the current uncertainty in global trade. He then zeroed in on soybeans in particular: “Containers, with their more measured allocations, with a 25-ton lot here and there, or 10 containers, or 100 containers, are still a means of fulfilling supply chains but perhaps in another fashion - smaller lots, more frequent sailings than procuring soybeans by 5,000 or 10,000 tons in the hold of a ship.”
Containers now account for only a bit more than 3% of total soybeans exports, according to a recent study by Informa Economics IEG, commissioned by the Illinois Soybean Association and the Soy Transportation Coalition.
China certainly knows how to hit American farmers where it hurt. China is, by leaps and bounds, the world’s largest importer of soybeans, accounting for about two-thirds global imports. The US has been China’s second biggest soybean provider, closely trailing Brazil. Last year, American soybeans accounted for about 40% of China’s total imports, with revenue for American farmers totaling some $14 billion.
The sudden loss of the China market has already caused the cash price of American soybeans to drop some 18% since May. “Farmers are staring at significantly lower prices than before the trade dispute,” explained Chad Hart, an economics professor and crop markets specialist at Iowa State University. Hart estimated that American farmers could lose more than $600 million depending on how long the trade wars last.
One of the first dramatic images of the impact of the trade war was a bulk carrier laden with soybeans churning in circles in the Yellow Sea. The Peak Pegasus was carrying some 70,000 tons of soybeans and steaming toward the Chinese port of Dalian in early July. When China imposed retaliatory duties, the vessel was mere hours from port. It spent the next month bobbing in the waters off the Chinese coast until the recipient, Sinograin, agreed to pay duties, estimated to cost nearly $4 million, on the $23 million cargo.
A Whole Lot of Beans Looking for a New Home
Soybeans now constitute America’s most valuable export crop and China has been, by far, the biggest market. For the fiscal year ended September 30, 2018, US soybean exports totaled $21.6 billion, already down 9% from the previous fiscal year. About half of US soybean production, which has grown by more than 60% in the past decade, is destined for international markets.
In 2017, farmers exported 2.174 billion bushels, or 59.2 million metric tons. Soybeans are used primarily in animal feed and as vegetable oil.
This year, USDA projections show, soybean yields will likely increase 6% to 4.69 billion bushels, or 127.65 million metric tons. Record harvests on top of the loss of the China market constitute what Hart calls “a double whammy.”
American farmers must now find alternatives for some 36.5 million metric tons of their soybeans previously earmarked for China. “That’s a whole lot of beans searching for a new home,” said Hart.
All this has sent American soybean marketers scampering. One partial solution is an expansion of countries that buy the crop. Hart called this the “menu approach” to trade, as he listed growing markets overseas for US soybeans: Mexico, Argentina, Thailand, Indonesia, even Iran before Trump re-imposed sanctions.
Sigman added Egypt and Pakistan to the list, then said: “There are other markets across Africa and Asia that have barely been tapped, and have long-term future growth potential.”
Many of these newer destinations require a different logistics approach – containers instead of bulk carriers. A bulk carrier can transport tens of thousands of tons at a time, while a 20-foot container holds just 25 tons.
“By meeting out small portions, 25 tons at a time, [shipments] can be used in smaller livestock operations and distributed cost effectively,” said Sigman. “The container brings that range of competitive advantages as we seek to develop not only the long-term growth markets but the growing markets in the maturing and mature markets.”
Sigman cites the islands nation of Indonesia as an example. In Indonesia, soybeans are used for animal feed and for human consumption as well, in the form of tofu and tempeh, an indigenous fermented product. American soybeans are so far imported entirely for tofu and tempeh.
In Indonesia, domestic production is falling, even though demand for soybeans is growing. But demand is decentralized and spread over any number of islands. Containers not only hold far less than bulk, but can be delivered into smaller, far-flung ports servicing a disbursed farming population. “Containerization is much more effective in feeding those small lots to outposts where livestock are fed,” Sigman said.
Of course, on a per ton basis, it’s still much cheaper to send soybeans by bulk than by container.
Shipping by river barge to the Port of New Orleans remains the cheapest mode of domestic transport, a USDA study last year concluded. The Informa study bolstered that conclusion. From Illinois, for example, most soybeans are loaded onto 110-ton grain cars in trains that stretch to 110 cars. These carry the grain by rail from Chicago to bulk loading terminals in Washington state, where they are loaded onto 60,000 to 90,000 tons bulk carriers. (One train can carry up to 10,000 tons.) It costs on average about $170 per metric ton from Chicago to China, according to Informa, with the intermodal leg costing $87.47 a ton.
A barge, by contrast, from Peoria, Illinois, that takes soybeans down the Illinois River to the Mississippi River, then transshipped in New Orleans to ocean vessels costs half that to China. The barge leg itself is about one-fifth the cost of rail. (See sidebar on page 8).
Soybean marketers have been eyeing containers for some time, in part because so many return empty to Asia and, to a lesser extent, Europe. Providing backhaul trade, even at a discounted price, means container vessels gain. “We’ve nurtured that market and identified the head-haul, backhaul with carriers that enables optimal revenue for the carriers,” Sigman said.
American soybean marketers have best developed this type of trade with Taiwan, which held a 28% market share of American containerized soybean exports, according to the Informa study. Indonesia, China, Thailand, Malaysia and Vietnam follow.
The Box: Less Bulk, More Selectivity
Mike Steenhoek, Soy Transportation Coalition’s executive director has a different take on the greater use of containers: Less bulk, but more selectivity.
“Historically, to be successful in the international marketplace for agriculture, particularly for commodity crops soybeans and corn, required one to simply get it from point A to point B at the lowest cost,” said Steenhoek. “Because of that, we developed a supply chain that was predicated on multiple steps of consolidation and aggregation.”
He listed these steps: Farm to local elevator to barge loading facility or rail shuttle facility to the export terminal to ship.
In the past, customers also wanted to pay the least amount of money for the soybeans. But that’s slowly changing, said Steenhoek, as some customers, at least, are beginning to talk about localization of source, quality preservation, minimizing contamination and damage. “Some really want identity preservation, a particular profile of the soybean, because they’re making a very high value product like tofu in Japan,” Steenhoek said.
One possibility for growth is Europe. With the loss of the China market, the EU becomes the biggest recipient of American soybeans. However, EU regulations have limited American soybean usage because of laws prohibiting human intake of GMO agriculture. So, the European market has been limited to animal consumption. That’s big, but could grow some more with containers.
Marketers Can Attack on Two Fronts
According to Sigman, American exporters are eyeing European destinations further east such as Poland and Hungary, where ports are better suited to receive containers than the big terminals, notably in Rotterdam, where most of the bulk soybeans are now destined.
Secondly, some American farmers could well decide to grow non-GMO crops specifically for the European market.
All this could boost demand for American soybeans, but it won’t come overnight and it still doesn’t solve the biggest issue of what to do about the loss of the Chinese market. One response is for American farmers to shift back into corn, which could well begin to happen next year.
The industry is also worried that with no end to the trade wars in sight, producers like Brazil will cement long-term relationships with China that will be hard to break, even if and when the US-China disputes end.
“It takes time and money to shift your sources,” said Hart. “Even if things were to be reversed today, we’re not going to be able to get back to the market shares pre-dispute.”